Oberthur warns of first half slow down

Sales as of the end of June 2006 reached EUR244.7 M, showing 2.3% growth at current exchange rates over the EUR239.2M revenue recorded in the first half of 2005.

In a delicate environment under highly competitive conditions, Oberthur Card Systems delivered strong sales.

During the second quarter of the year, Oberthur Card Systems delivered 58.7 million microprocessor cards, breaking the record of 58.2 million cards sold in Q4 2005, a period which is traditionally characterized by a strong seasonality. This performance was highlighted by a 30.5% increase in volume compared to Q2 2005.

The microprocessor card top line reached EUR77.3 M.

With sales amounting to EUR41.9M in the Mobile segment, the company posted 17.8% growth pushed by successes in North & South America, Middle East, Africa and improved penetration of the Asian mobile market.

Reaching 36 million cards, volumes were up 85.9% compared to the same period of last year. The combined effect of the sustained demand and improvement of product mix in volume (62% of high-end cards compared to 50% in Q2 2005) offset a strong price pressure in emerging areas,

The payment segment top line amounted to EUR21.9M, a 38% decrease at constant exchange rate compared to Q2 2005. This decrease in sales is due to two momentary and localized events.

Firstly, the French market, in which Oberthur Card Systems has a leading position, is experiencing a temporary lower activity with the delay of DDA migration.

Secondly, in the UK market, the extremely strong revenue in Q2 2005 led to a comparative decrease in sales.

With 15.1 million cards delivered against 16 million, volumes were stable sequentially.

Compared to Q1 2006, the average selling price erosion was limited in Europe where almost 90% of volume was achieved.

Sales for Identity and Security sector amounted to EUR13.5M, up 62.8% on a year-on-year basis. Volumes for this product segment reached 7.7 million units, a 115.4% growth fuelled by strong demand in the Pay TV sector especially in Europe and China. In North Africa and Asia, the company took advantage of new opportunities in the governmental sub-segment. The average selling price decrease was mainly attributable to the expected price pressure in the pay TV sector on a year-on year basis; sequentially, the erosion was controlled with a 3.1% decrease.

Sales in the Other Cards Segment - magnetic stripe cards, scratch cards and memory cards - amounted to EUR21.6M, showed a 16.7% increase year-on-year. This achievement is mainly due to a sustained activity in the magnetic payment card segment in the United States and strong deliveries of scratch cards in Africa: the impact of Africard acquisition represented 4% of this growth.

Sales of Services and Solutions - EUR24.0M - are up 3% compared to Q2 2005. In France and UK, this activity has slowed down in parallel with the payment smart card evolution. In other European countries such as Spain, Netherlands, Italy, personalization activities were dynamic.

Outlook
In a highly competitive market and a delicate environment characterized by the sector's consolidation, Oberthur Card Systems pursues its strategy of development and expansion

After an agitated period and slower activity in its traditional markets, Oberthur Card Systems expects its operating margins to be significantly eroded in H1.

The Company is confident in the second part of the year, in terms of business opportunities and worldwide development but also thanks to a strict and rational cost control plan.

Business

In the Mobile Communication segment, the company will capitalize on almost 20 new customers conquered in H1 and on a traditional seasonality in western countries favourable to high-end products. In parallel, the company should benefit from the willingness of European operators to move forward the digital convergence planned for the second half of the year. Lastly, improvements in the industrial process and a strategic acquisition in the sector will give Oberthur Card Systems strong leverage for profitable growth in emerging areas and the opportunity to address markets which were not targeted before.

The Payment market, which is Oberthur Card Systems preferred segment, will enter a new ramp-up phase thanks to DDA migration in France, contactless orders in the US and Asia but also as a result of major outsourcing contracts for banking services. The company is ahead of its competitors in personalization activity essentially through new bureaus, partnerships and joint ventures throughout the world: this light footprint strategy will be further developed and should continue to pay off in the months to come.

In the Identity & Security segment, Oberthur Card Systems will take advantage of its market share in the US governmental market and of the major contracts that have been announced recently to reinforce its leading position in this still emerging market.

Industrial policy
The deployment of state-of-the-art pre-sales and personalization tools will bring the best of technology in terms of flexibility and performance to all offices around the world, while enhancing the company's profitability. These tools will allow Oberthur Card Systems to better serve its customers and to benefit from a competitive advantage. This is especially relevant in the banking segment, which promises sustained growth in the coming years.

Cost control & rationalization plan:
This cost control & rationalization plan, which aims at improving the company cost level, should lead to savings estimated at between 16 and 20 million euros per year. In June 2006, the UK and USA facilities have started to implement the restructuring plan, which will continue to evolve.

The company is confident in its capacity to return to sharp and profitable growth over the next three years. The Group is in position to take full advantage of all opportunities of development and to rapidly benefit from its drastic cost-control and rationalization plans.